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What Is the Purpose of Technical Analysis?

The core purpose of technical analysis is to carry out stock price forecast by looking at past data.

While fundamental analysis is one of the most effective methods of determining the long-term movements of a stock, technical analysis provides a similar tool for short-term traders. The latter is used universally by a large number of traders as it is quite important to them for various reasons. Some of them are elaborated below.

One of the most important assumptions that is made while undertaking technical analysis is that the stock prices follow a trend.

It identifies a pattern of fluctuations

One of the most important assumptions that is made while undertaking technical analysis is that the stock price follows a trend, and this trend repeats itself in a logical pattern. While identifying these patterns can be complex at times, it enables traders to make sense of the short-term fluctuations a stock experiences. More importantly,it helps in predicting the future movements of stock prices.

It enables effective decision making

Since most traders buy stocks and sell them (or vice versa) on the same day, they need to decide quickly on the purchase and sale price. However, using fundamental analysis for such a short-term trade is not possible. In such a scenario, technical analysis is the only type of research that can provide traders some idea about the direction of the stock price. There are several automated tools available today that can pull out technical information according to your preference.

It is important to note here that this type of analysis is based on a number of assumptions, and it gives utmost important to the price movement, ignoring other factors. Hence, the predictions related to price movements may not be always accurate.Despite this, it is widely used by traders mainly because it serves the above-mentioned two purposes.

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